The News Journal (Delaware)
By: Eric Ruth
October 18, 2010
For small businesses, it sure seems like a backward sort of economic recovery.
Even as the big banks wade in bailout money and boost executive bonuses, small businesses are feeling the same old recessionary blues -- credit lines are still being cut, new health care costs are possibly on the way, and many have been scrambling to survive as business slowly revives.
Now, three years after the tough times began, small businesses are no closer to seeing a handout, but they are starting to get more of a hand-up.
Government efforts to ease financial pressures on small business are coming together as the year winds down. A new tax credit for health-care costs is now in place. And money to help businesses secure financing is flowing to the states like never before -- Delaware businesses now have potential access to an extra $13 million in loan-guarantee money that could eventually be leveraged into $131 million in new lending.
Officials say these funds are a critical component of a larger effort to boost opportunities through the Small Business Jobs Act, signed into law by President Obama last month. The Jobs Act also goes beyond financing, enacting eight new small-business tax cuts that aim to give owners greater incentive for new investments and expansion. The bill also includes capital designed to encourage lenders to expand credit offerings.
Jayne Armstrong, director of the Delaware District Office of the Small Business Administration, said the bill is the most important legislation small businesses have gotten in a long time.
"It's going to be huge," she said. "We've been waiting on that."
More hope in a depressed climate
The programs come at a time when businesses are seeing more hope, but still facing formidable challenges. In September, a three-month slide in small-business confidence finally subsided, as fewer owners reported cash flow issues, according to the Discover Small Business Watch. At the same time, the survey found that 46 percent of small business owners were still having cash-flow issues, and a record 68 percent rated the economy poor, up from 62 percent in August.
Other results seem to indicate there may be weak demand for the financing: A record-low 16 percent of owners polled by Discover said they plan to increase spending, and 57 percent intend to cut spending, the highest in the history of the survey. More than 70 percent said they are waiting for the economy to improve before they do any hiring.
When asked if a loan was crucial to growing their businesses, 71 percent said it wasn't; and 20 percent said it was.
Yet for some businesses, access to new credit has become a crucial element in efforts to resolve potentially disastrous cash-flow issues. At Excel Business Systems near Newark, the credit crunch prompted a major supplier of office machines to shut down its in-house financing arm, sinking Excel's $400,000 line of credit with just 60 days' notice. That in turn upended Excel's ability to help customers finance equipment leasing, even as demand was already on the decline.
"It was kind of like a perfect storm in many ways. Business was off for us for the first time ever," said Frank Montisano, co-owner of the 23-year-old company. "'08 and '09 were nightmares. ... Every which way we looked, somebody was tightening down."
Turning to the Delaware District Office of the Small Business Administration, Montisano and co-owner Joseph DiMarco sought a loan guarantee, and found more than they expected.
Not only did the assurance of government backing ease the bank's concerns, a beefed-up Recovery Act made made it possible for the SBA to provide other crucial elements of relief -- increasing its guarantee to 90 percent of the loan; and eliminating all loan fees, which can run from 2 percent to 4 percent of the loan.
Last month, Excel closed the books on its best fiscal year ever.
"I've always kind of scoffed when I heard about politicians saving jobs," Montisano said, "but in this case it did."
Loan sizes increased
The Jobs Bill is allowing the SBA to offer even greater help than higher guarantees and fee elimination. Maximum loan sizes have been permanently increased -- from $2 million to $5 million for so-called 7(a) guaranteed loan program and 504 loans (the SBA's top programs); and from $4 million to $5.5 million for 504 manufacturing-related loans. SBA "Microloans" have been permanently increased from $35,000 to $50,000; and Express loan limits have gotten a temporary increase from $350,000 to $1 million -- increasing access to the working capital that firms can use to buy new inventory and take on their next order.
At the same time, the government is also making more capital available to small banks and boosting their incentives to lend.
On the other end of their finances, small businesses also have new tax benefits to take advantage of. The Jobs Bill includes eight new small-business tax cuts:
•Small businesses that buy new equipment can immediately write off the first $500,000 of investments.
•Capital gains taxes on key investments into your own business have been eliminated.
•Entrepreneurs who take a chance on a new idea can now deduct the first $10,000 of start-up costs -- double the previous limit.
•Self-employed workers can now deduct 100 percent of the cost of health insurance for their families and themselves from their taxes.
The new Small Business Health Care Tax Credit also can mean significant savings, financial advisers say:
•For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by small-business employers; and 25 percent of premiums paid by tax-exempt organizations.
•Beginning in 2014, the maximum tax credit will go up to 50 percent of premiums paid by small business-employers and 35 percent for tax-exempt organizations for two years.
The credit also has a provision that allows any unused credit to be applied to all previous years the credit was available -- or carried to future years until the credit is used, according to Mark Steber, chief tax officer for Jackson Hewitt Tax Service.
The maximum credit goes to smaller employers -- those with 10 or fewer full-time equivalent employees -- paying annual average wages of $25,000 or less.
"We want small businesses to insure their employees," said Sen. Tom Carper, a strong proponent of the tax break. "But we don't want them to break the bank doing it."
Contact Eric Ruth at 324-2428 or email@example.com